the Complexion Connexion

3 Readings on the Financial Crisis

Alan Beattie explains the financial crisis to Her Majesty, The Queen of England, who apparently asked, “If these things were so large, how come everyone missed them?”

One of the best outline sketches of the forces affecting meltdown ...

House buyers took the view that as long as someone was prepared to lend
them money, things would be OK. The mortgage lenders reckoned that as
long as they could package up the mortgages as newfangled financial
derivatives (it’s a long story, Ma’am) and sell them on, that would be
fine. The financial institutions surmised that as long as the credit
ratings agencies were giving the derivatives their seal of approval,
everything would be dandy. The credit ratings agencies thought –
actually, it is pretty hard to work out what in God’s name the credit
ratings agencies were thinking, except that as long as their rivals
were giving these assets the thumbs-up, they had better do so as well.

Michael presents Panic as the bookend to his maiden voyage, Liar's Poker, an inside job from his vantage at Solomon Brothers about hubris on Wall Street in the late 1980s'. Panic is among the clearest and most successful journalistic pieces in explaining what the CDO & CDS market participants -- the people -- have been doing, their intentions, their objectives & their attitudes.

Of most interest will be the chapters entitled “Mr Market Buys a
House” and “Mortgage Science Projects”. His prescience is alarming. In
August 2001, when many were preoccupied by the fall-out from the tech
boom and the risk of deflation, he devoted a column warning that US
house prices were up 8.8 per cent from a year earlier. “What could
explain a bull market in a non-earning asset in a non-inflationary
era?” he asked. “Ample credit is the first answer, low interest rates
the second. An overly narrow definition of ‘inflation’ is the third.”

He
also warned that Fannie Mae and Freddie Mac had extended their lending
by more than 12 per cent over the preceding year and that Americans
owed 45 per cent of the value of their homes, up from 14 per cent after
the war. To end the column, he disparaged comments by Alan Greenspan,
then the chairman of the Fed, that rising house prices were “a very
important contributor to the American economy”, warned against the “day
trading of houses” and said that “the American house market can be
described as speculative”. This is exactly what we should have been
worrying about in the summer of 2001.